Don’t buy yet – these stocks have further to fall

 

Techs tumble!

Don’t tell me you aren’t seeing the same headline, or some version of it, everywhere you look. Tech stocks lost a little ground during the week-before-last, quickly recovered, then lost about the same amount last week, although over a longer period of time. The total loss for the hardest hit stocks, such as NVIDIA (NVDA) is about 7%. As for the NASDAQ, (has it officially changed its name to the “tech-heavy-NASDAQ?)” it is down less than 3%. There is a lesson here, and the lesson is that those currently holding tech stocks don’t exactly have a high tolerance for pain.

So why is that a lesson? What does it mean? Well, those who shed the first tears at would have, in another era, been viewed as normal day-to-day stock fluctuation very likely lack the discipline to hold through a serious downturn, and a serious downturn is coming, sure as sunrise. When it comes, they will sell, and a serious downturn will become an even more serious downturn. In other words, this is going to get worse before it gets better.

Unless, of course, you are already in cash to some degree, in which case, it’s going to get better before it gets awesome. Here are some stocks that you shouldn’t buy. While technically, I could tell you to do your own research before trusting what I say, in this case, I’m not actually suggesting that anyone do anything, so I think I’ll throw caution to the wind and proceed sans disclaimer.

Whew! I feel naughty already!

Alibaba (BABA)

Fallen: 8%                   Consider buying after: 15%

I was a big fan of Alibaba before its recent price-spike. You may remember that it was less than a month ago that I bought BABA call options, and shared the trade with my readers. I’m not going to dwell on this, but if you followed me on that trade, you are probably trading stock today from Costa Rica (as I am) or some other tropical paradise. I don’t necessarily recommend waiting until BABA shares fall back to their pre-spike level before buying them, as they may never do so, but given the two-steps-forward-one-step-back pattern of this stock, I think you’ll very likely be able to grab it at $130 or below.

BABA

Chart courtesy of www.stockcharts.com

Amazon.com (AMZN)

Fallen: 5%                   Consider buying after: 25%?

If you can accept that we are a bit overdue for a correction, then consider the two factors that indicate, more than all others, which stocks will be punished the most severely when the correction comes. First, which stocks have risen the most in the last six to 18 months? In the case of AMZN, that’s a huge 25% to 55%. Second, consider which stocks are unsupported by present earnings (bull markets love potential future earnings; bear markets hate them). In this case, AMZN has the pathetic trailing P/E of 181. If you are kicking yourself for not buying AMZN at $700, don’t kick too hard — just wait.

AMZN

Chart courtesy of www.stockcharts.com

Netflix (NFLX)

Fallen: 5%                   Consider buying: something else.

If this were the Netflix of the past, it would be now that the company was creating some totally unforeseen way of making money, thereby escaping from a seemingly inescapable trap, seconds before the walls closed in. But the Netflix of today has little to offer, other than new episodes of popular two popular series: Orange is the New Black (loads of fun) and House of Cards (barely watchable). Well, there is also the assurance from Reed Hastings that the company will continue to grow at the expected rate, despite the decidedly unexpected emergence of powerful rivals for your streaming-entertainment dollars. Some may choose to believe Hastings, and clearly, he has delivered in the past, but I find that when CEOs are telling the truth about the money they are going to make, they are ready and willing to explain how they intend to make that money. Hastings still talks as if Netflix were the only game in town, leading me to assume that he is either being deceptive or living in a dreamworld.

NFLX

Chart courtesy of www.stockcharts.com

Tesla (TSLA)

Fallen: less than 2%                Consider buying after: 50%

I feel I’m being generous with Tesla. I’m willing to concede that despite huge losses and a demonstrable penchant for costly nepotism, the company is poised to become an earner in the near-term, and an important company to the American economy in the long-term. For that reason, I give the company a very-rough, ballpark estimated value of $20 billion. As I said, it seems generous to me, and why wouldn’t it be? After all, I’m a self-proclaimed fan of Elon Musk and a believer in green technologies. I was also bullish very early on Tesla, and the call helped me establish my legitimacy in this business. Though I bought TSLA puts at the same time I bought BABA calls, I have since sold both. This call isn’t personal or emotional — quite the opposite.

Still, when a company that should be valued at $20 billion is valued by the market at $60 billion, it becomes extremely likely that it will be valued at $30 billion at some point in the future, and almost surely before it is valued at $120 billion? Wait… $120 billion? Oh, hadn’t you considered that? To double your money in TSLA (and if you want less than a double, wouldn’t you invest instead in something more conservative), the stock price has to rise to $750 per share. It has become so expensive as to wash out the future value of even spectacular present gains.

TSLA

Chart courtesy of www.stockcharts.com

Apple (AAPL)

Fallen: 7%                   Consider buying after: 15%?

In addition to the day to day jaggies that all stocks experience, AAPL also rides up and down on huge waves. These waves have a period of about 24 months, and they exist because of Apple’s huge market cap. (You can see what I mean very clearly, btw, on the accompanying 2-year chart.) Because of AAPL’s high price, it takes a while for companies to accumulate a large position, and it takes even longer for them to liquidate a position. Because nearly every institutional investor in the world owns some APPL, they act together to depress the stock price, even as they seek to get out at the highest price they can.

For this reason, we should expect to see more outflow from AAPL before the current round of rotation out of tech is over, but it can’t last too long this time, before AAPL starts to have a mind-blowingly low valuation that will pull in — strange as it may sound — value investors. If shares of AAPL fall to $130, I would pick them up with confidence.

AAPL

Chart courtesy of www.stockcharts.com

Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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